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Jewelry and Perverse Incentives

Careful! It’s a perverse incentive!

With a perverse incentive, a company incents its employees to behave in ways that are contrary to the company’s interests. The company, in other words, pays employees to do things that reward the employee but prevent the company from reaching its stated goals. (See here and here for more detail).

Why would a company do that? Sometimes the stated goals of the company are not its actual goals. For instance, the company may say that it aims to increase customer satisfaction. That’s nice wind dressing but the real goal may be to “make the numbers”. So, the company may incent its sale force to act in ways that make the numbers even if such behavior also reduces customer satisfaction. In this example, studying the perverse incentive can help us understand what the company’s real goals are. This seemed to be the case at Wells Fargo, for instance.

In other cases, one business process conflicts with another. Perhaps each process is perfectly fine when running in isolation. When they run in tandem, however, they create perverse incentives. A good example comes from Signet Jewelers, the owner of several retail jewelry chains, including Jared’s, Kay Jewelers, and Zales. (I discovered this case in the business pages of the New York Times. Click here for the original article.)

The Signet situation involves two different business processes: sales and financial credit. By combining the two, Signet created a perverse incentive. Each business process works fine in and of itself. It’s the combination that spawns confusion. Here are the two processes:

  1. You’re a banker who makes loans to individuals and companies. Your goal is to make profitable loans that are repaid in a timely manner. Your compensation is based on this. If you make a lot of good loans, your compensation goes up. If you make risky loans that aren’t paid back, your compensation goes down. Your incentives line up nicely with the bank’s goals.
  2. You’re a manager at a retail jewelry chain. You aim to sell more jewelry than you did last month or quarter or year. If you do, your compensation goes up. If you don’t, it goes down. Again, your incentives line up nicely with your company’s goals: to sell more jewelry.

Now let’s change the scenario. You’re now the manager of a retail jewelry store that also offers loans to its customers to enable them to buy more jewelry. Your compensation is based on how much jewelry you sell.

It sounds like a good idea. So, what’s wrong with this picture? To sell more jewelry, you have a strong incentive to give loans to non-credit-worthy individuals. You make the sale, but a relatively high proportion of the loans you make go bad and are not repaid. The company either writes off the loans or spends a lot of money with debt collectors trying to redeem them. The net result is often a negative: you sell more but also lose more.

The Signet example is just one of many. Once you’re familiar with the concept of perverse incentives, you can find them most everywhere, including the morning paper.

 

Too Much Rhetoric? Or Not Enough?

When will we learn to argue without anger?

In the Western world, the art of persuasion (aka rhetoric), appeared first in ancient Athens. We might well ask, why did it emerge there and then, as opposed to another place and another time?

In his book, Words Like Loaded Pistols, Sam Leith argues that rhetoric blossomed first in Greece because that’s where democracy emerged. Prior to that, we didn’t need to argue or persuade or create ideas — at least not in the public sphere. We just accepted as true whatever the monarch said was true. There was no point in arguing. The monarch wasn’t going to budge.

Because Greeks allowed citizens from different walks of life to speak in the public forum, they were the first people who needed to manage ideas and arguments. In response, they developed the key concepts of rhetoric. They also established the idea that rhetoric was an essential element of good leadership. A leader needed to manage the passions of the moment by speaking logically, clearly, and persuasively.

Through the 19th century, well-educated people were thoroughly schooled in rhetoric as well as the related disciplines of logic and grammar. These were known as the trivium and they helped us manage public ideas. Debates, governed by the rules of rhetoric, helped us create new ideas. Thesis led to antithesis led to synthesis. We considered the trivium to be an essential foundation for good leadership. Leaders have to create ideas, explain ideas, and defend ideas. The trivium provided the tools.

Then in the 20th century, we decided that we didn’t need to teach these skills anymore. Leith argues that we came to see history as an impersonal, overwhelming, uncontrollable force in its own right. Why argue about it if we can’t control it? Courses in rhetoric — and leadership — withered away.

It’s interesting to look at rhetoric as an essential part of democracy. It’s not something to be scorned. It’s something to be promoted. I wonder if some of our partisan anger and divisiveness doesn’t result from the lack of rhetoric in our society. We don’t have too much rhetoric. Rather, we have too little. We have forgotten how to argue without anger.

I’m happy to see that rhetoric and persuasion classes are making a comeback in academia today.  Similarly, courses in leadership seem to be flowering again. Perhaps we can look forward to using disagreements to create new ideas rather than an anvil to destroy them.

You Too Can Be A Revered Leader!

You too can be a revered leader.

You too can be a revered leader.

I just spotted this article on Inc. magazine’s website:

Want to Be A Revered Leader? Here’s How The 25 Most Admired CEOs Win The Hearts of Their Employees.

The article’s subhead is: “America’s 25 most admired CEOs have earned the respect of their people. Here’s how you can too.”

Does this sound familiar? It’s a good example of the survivorship fallacy. (See also here and here). The 25 CEOs selected for the article “survived” a selection process. The author then highlights the common behaviors among the 25 leaders. The implication is that — if you behave the same way — you too will become a revered leader.

Is it true? Well, think about the hundreds of CEOs who didn’t survive the selection process. I suspect that many of the unselected CEOs behave in ways that are similar to the 25 selectees. But the unselected CEOs didn’t become revered leaders. Why not? Hard to say …precisely because we’re not studying them. It’s not at all clear to me that I will become a revered leader if I behave like the 25 selectees. In fact, the reverse my be true — people may think that I’m being inauthentic and lose respect for me.

A better research method would be to select 25 leaders who are “revered” and compare them to 25 leaders who are not “revered”. (Defining what “revered” means will be slippery). By selecting two groups, we have some basis for comparison and contrast. This can often lead to deeper insights.

As it stands, the Inc. article reminds me of the book for teenagers called How To Be Popular. It’s cute but not very meaningful.

Corporate Culture: Counting The Uncountable

Stand by me.

You can’t measure love.

I was in a meeting not long ago with a client whose organization is undergoing a significant transformation. We were discussing what needed to change and how we might promote the appropriate change efforts. A senior executive spoke up to say, “Well, you get what you measure.” Nobody challenged the assumption behind the thought and we began to focus on how to measure change in the organization.

I had, of course, heard similar statements many times before. Business schools emphasize measurement as a key ingredient of management. As a leader, you point the way, establish some key measurements, and then harvest the results. Sounds simple, doesn’t it?

But think about the things that we don’t bother to measure – or that we don’t know how to measure. These include love, respect, hope, initiative, creativity, open-mindedness, ability to resolve conflicts, receptiveness to new ideas, focus, drive, and resilience. Do we really not care about these things?

We tell managers that the most important thing they can do is build a positive, engaging organizational culture. (See here and here). We also tell them they can only get what they measure. Yet many of the components of culture are simply not measureable. I have yet to hear a manager say, “In the third quarter, we increased corporate resilience by 3.2% compared with the same quarter in the previous year.”

So, how do we help managers build a positive culture even when they can’t measure it? Here are some thoughts:

  • The answer is not a number on a piece of paper. It’s OK to look at numbers but we need to remember that a number is an abstraction of a measurement that is an abstraction of reality. Looking only at numbers is like driving your car by looking only at the speedometer.
  • Trust is an unrecognized but important ingredient. We focus on measurement partially because we don’t trust our eyes, and ears, and subordinates. A measurement is supposed to give us an “objective” view of the organization. But a measurement is only as objective as the person taking the measurement – which is to say, not very. If we can create a culture built on trust, we can learn more about our organization than a measurement will ever tell us. (In this regard, it’s useful to review Edwards Deming’s 14 points of management and his red bead experiment).
  • Learning to observe is more important than learning to measure. We forget that measurement is just one form of observation. Management by walking around still works. Taking groups of employees out to dinner will teach you more than a spreadsheet will. Practice being naïve – ask questions that a rookie would ask. You may think you don’t need to ask certain questions because you already know the answer. But you’re probably wrong.
  • A good conversation is more important than a staff meeting. Staff meetings can be useful but they’re also very structured. You get the information that the structure permits. A good conversation is much more open-ended. You can wander about until you touch on the really important issues.
  • Questions are more important than answers. A number from a measurement purports to give us an answer. But it only answers the question you asked – and the answer may not be accurate. Learn how to ask probing questions that get rich and unexpected answers. Tip: a good course on critical thinking will help.

I think we obsess about measurement because we have a bad case of physics envy. We want our organization to behave like a physics experiment. If we apply Force X, we get Result Y. It doesn’t work that way and never will. Time to get over the measurement mania.

Sending A Memo To Your Future Self

Memo to self...

Memo to self…

We know a lot about the future. We can’t predict it precisely but we can often see the general contours of what’s coming. With a little imagination, we can prepare for it. We just need a structure to hang our imagination on.

As an example, let’s take organizations that are undergoing rapid and/or stressful change. We know a lot about such organizations. We know, for instance, that:

  • Communication suffers – people are distracted and don’t listen well. Bain estimates that only 20% of the information communicated actually gets through. Attention spans get shorter than ever. Tip: don’t give long speeches.
  • Memory becomes less accurate – stress affects memory in odd ways. Even in normal times, different people remember the same event in different ways. It gets worse in stressed out organizations.
  • We hear mixed and contradictory messages – change doesn’t happen smoothly across the organization. Some departments move quickly; others move slowly. When we talk to different people, we’ll hear different messages. It’s hard to tell what’s really going on.
  • We jump to conclusions more urgently — as the Heath brothers point out, we jump to conclusions all the time. Stress makes us even more jumpy. We’re anxious to get a solution and don’t take the time to consider the evidence.
  • Trust withers – it’s hard to trust people when we remember things differently, hear different messages, and jump to different conclusions.

I could go on but you get the picture. We also know that organizational change happens in three phases. At least, that’s what the theorists tell us. Here are four different models of the change process (here, here, here, and here). They use different descriptors but all four describe three distinct phases of change. Note that the middle phase is a trough – that’s where the going gets tough.

The trick to preparing for the future is to start imagining it before we get to the trough. Change managers refer to the trough with words like frustration, depression, resistance, and chaos. It’s not a good time for imagining.

So we start the imagination process in Phase 1. We’re still cool, calm, and collected. We can think more or less clearly – especially if we’ve studied critical thinking. We can think about the future dispassionately and plan how we want to behave.

We sit down in groups and discuss the issues we can anticipate in Phases 2 and 3. We know, for instance, that we’re likely to hear contradictory messages. How do we want to behave when we do? What can we do now to outline “best behaviors” for the stress created by contradictory messages? What can we do to ensure that we actually implement the best behaviors? What else might happen in the trough? How do we want to behave when it happens? We talk, discuss, debate, imagine, and agree.

We then write down what we’ve agreed to. In effect, we’re writing a memo from our current selves to our future selves. From our cool, calm, dispassionate selves to our stressed and anxious future selves. We make clearheaded decisions in Phase 1. When we get to Phase 2, we can refer back to our own wisdom to help govern our actions

I call this process Structured Imagination™. What we know about the future gives us the structure. We use the structure to focus our imaginations. We imagine what will happen and how we’ll behave when it does. This prepares us for the hurly burly of change and also vaccinates us against many of the ill effects of the trough.

Structured Imagination is not a perfect process – the future may still throw us a curve every now and then. However, I’ve used the process with multiple clients and they say that they face the future with greater confidence and clarity. That’s pretty good. If you’d like me to do a Structured Imagination workshop with your organization, just drop me a line.

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