Thursday, March 23, 2017

What's the Best Incentive Compensation Strategy for Salespeople?

Harvard Business School Professors Doug Chung and Das Narayandas have conducted an interesting new study about compensation schemes for salespeople.  They conducted a field experiment with a Swedish electronics retailer.   The firm used a monthly quota system to motivate and reward salespeople.   The scholars tested the effect of shifting to a daily quota system.  What did they find? Overall revenue increased with the installation of a daily quota system. HBS Working Knowledge summarizes their conclusions:


They found that sales productivity increased by 4.9 percent, on aggregate, under the daily quota scheme. But the results were more dramatic among the lowest quartile of salespeople—those with the worst recent sales records in the company. That group saw an 18 percent increase in sales productivity under the daily quota.

Chung explains that low performers are susceptible to falling behind in a monthly quota scheme, becoming less motivated or less capable of meeting their quota the further they fall back. “So they just give up,” he says.

A daily quota, on the other hand, provides “a fresh start every day in which past performance does not affect current payoff and thus does not disturb current motivation,” the researchers write. “For high-performing salespeople, because they are more immune to the disutility of effort, even if they experienced bad luck earlier in the month, they would put in the additional effort necessary later in the month to meet their monthly quotas.”


However, this finding is not the end of the story.  The scholars also examined the type of products that these employees sold before and after the change in quota scheme.  As it turns out, the retailer sold many more low-priced goods with the new quota scheme, but fewer higher-priced, higher margin items.  Why?  The higher-priced items took more time to sell.  Thus, the daily quota system created a powerful incentive to push the items that were easiest to sell (the low-priced goods).  

What's the lesson of this story?  You have to decide what your strategic objectives are.  If you want volume, a more frequent quota makes sense.  If you are interested in being very successful at the high end of the market, then you do not want the quotas to be as short term in nature.  

Wednesday, March 22, 2017

Sears Acknowledges Possibility of Bankruptcy

Many of us have been predicting the demise of Sears for years.  The writing has been on the wall now for quite some time - falling sales, declining customer satisfaction, and many store closings.  Fortune reported this week that Sears is admitting (finally) that bankruptcy is a possibility. Phil Wahba of Fortune writes:

Sears Holdings has recognized for the first time that many people think the retailer is not long for this world.  In its annual report released on Tuesday, the retailer, which owns Sears and Kmart, said that its years-long sales declines, "indicate substantial doubt exists related to the Company's ability to continue as a going concern." In other words, many think Sears will go under.

Amazingly, Sears has lost nearly $10 billion in the last six years.  How long can they continue to sustain such losses?  Could they be headed to liquidation, not simply a restructuring under Chapter 11? Some think that may be the case.  For me, Sears represents what Harvard Business School Professor Jay Lorsch once described as a "gradual crisis."  Lorsch argued that firms struggle mightily when a threat emerges gradually and unfolds over lengthy periods of time.  They can find themselves rationalizing the threat and avoiding the hard truths.  No single event causes them to shake things up and shift direction in a major way.  By the time they begin to truly confront the threat, it's too late. They find themselves far behind the times, or simply unable to transform the organization that is so set in its ways.  

How Does Information Flow & Collaboration Take Place?

Tuesday, March 21, 2017

Becoming More Resilient

Maria Konnikova wrote a terrific article for The New Yorker last year, focusing on the research on resilience over the past few decades.   Konnikova describes the research conducted by developmental psychologist Emmy Werner.  Konnikova summarizes a key finding:

Perhaps most importantly, the resilient children had what psychologists call an “internal locus of control”: they believed that they, and not their circumstances, affected their achievements. The resilient children saw themselves as the orchestrators of their own fates. In fact, on a scale that measured locus of control, they scored more than two standard deviations away from the standardization group.

Then Konnikova turns to the research conducted by George Bonanno, a Columbia University psychologist.  She writes: 

One of the central elements of resilience, Bonanno has found, is perception: Do you conceptualize an event as traumatic, or as an opportunity to learn and grow? “Events are not traumatic until we experience them as traumatic,” Bonanno told me, in December. “To call something a ‘traumatic event’ belies that fact.” He has coined a different term: PTE, or potentially traumatic event, which he argues is more accurate. The theory is straightforward. Every frightening event, no matter how negative it might seem from the sidelines, has the potential to be traumatic or not to the person experiencing it. (Bonanno focusses on acute negative events, where we may be seriously harmed; others who study resilience, including Garmezy and Werner, look more broadly.) Take something as terrible as the surprising death of a close friend: you might be sad, but if you can find a way to construe that event as filled with meaning—perhaps it leads to greater awareness of a certain disease, say, or to closer ties with the community—then it may not be seen as a trauma. (Indeed, Werner found that resilient individuals were far more likely to report having sources of spiritual and religious support than those who weren’t.) The experience isn’t inherent in the event; it resides in the event’s psychological construal.

Konnikova concludes by reporting that scholars believe that people can change the way that they frame events in their lives.  They can be trained to reframe potentially traumatic events as positive ones.  If that is true, then we can actually become more resilient.  We are not destined to always act the way that we have acted in the face of potential adversity.  

Monday, March 20, 2017

Great Interview Question!

On Friday, I moderated a panel discussion at Bryant University's 20th Annual Women's Summit.   One audience member asked the panelists to describe their favorite interview question.  Gerardine Ferlins, founder and CEO of Cirtronics (a contract manufacturer based in New Hampshire), explained her favorite line of inquiry.  She asks job candidates to think of someone that they admire professionally... perhaps a former manager or colleague.  Then she asks the candidates to describe the characteristics and qualities of that person.  Ferlins explained that this question tends to tell you a great deal about the candidate.  In short, they often describe themselves!  They select someone who has the types of qualities that they think are most important.  You learn a great deal about someone's values, beliefs, and priorities when you ask this question.   In short, this interview question builds on the old adage:  You can tell a lot about a person by the friends they keep.   

Thursday, March 16, 2017

Write Your Company's Obituary

James Allen, co-leader of Bain Consulting's global strategy practice, has written a good article for the Wall Street Journal about how firms can avoid the fate of once-proud industry leaders such as Sears, Blockbuster, Circuit City, Research in Motion, and many others.  Allen starts by referring to a personal development exercise that many individuals have been asked to conduct at some point in their careers:  writing your own obituary.   The exercise is meant to clarify your priorities and objectives, and help you rediscover your true purpose and passion.  Allen argues that firms might take a similar approach.  Executives might try to write their company's obituary.  Here is an excerpt from his article: 

The same exercise can help CEOs determine what their organizations need to live a productive life, and what could lead to an untimely death. CEOs should imagine they are business journalists, writing a postmortem on how the company began a slide toward oblivion—how it lost its leadership position, was targeted by an activist investor or acquired by a company with a more successful business model. What were the likely causes? Which factors in the downfall were knowable but not seen or addressed by executives? Which former strengths became fatal weaknesses? What could senior leaders have done differently to position the company for success?  These theoretical obituaries would vary greatly in detail, but I suspect they will include a common thread: The natural life cycle of many companies goes from insurgency to incumbency to struggling bureaucracy to replacement by the next wave of insurgents.

Wednesday, March 15, 2017

Hootsuite's Czar of Bad Systems

Source: Wikipedia
Ryan Holmes, CEO of social media platform Hootsuite, has written a terrific article for Fast Company about the latest management initiative at his firm.   Holmes begins by recounting the story of one employee who became frustrated with the approval process required to send one customer a Hootsuite t-shirt as a gift.   The t-shirt cost $15.  The employee spent hours tracking people down to get the appropriate approvals.  That example may sound a bit crazy, but every organization has cumbersome, bureaucratic procedures that frustrate people who are just trying to get the job done.  These processes may have started out with good intent, but they evolve to the point where they make little sense in many circumstances.  Moreover, these types of processes tend to centralize decision-making authority over time.  They take away autonomy from the people on the front lines trying to get the work done.  Processes never die.  They almost always grow and become more complex.  

Hootsuite set out to change that dynamic.    One individual has taken on the unofficial position of "Czar of Bad Systems."  Holmes writes, "Our employees now have a go-to person who can take an objective look at processes that have outlived their usefulness. If people have a problem they can’t fix, even with help from their manager, they reach out to the Czar. In the past, these processes would’ve fallen through the cracks–they’d be cursed at but ultimately complied with. Now there’s hope that they might actually be corrected."  

Why do bad processes emerge in organizations?  Holmes explains, "Interestingly, most bad processes seem to boil down to a few common failings: needless complexity, unanticipated bottlenecks, or irrational fear of worst-case scenarios."  I would add one significant reason for bad processes: the desire by certain managers and executives to amass power and authority.  Simply put, some managers want the right to approve or reject certain decisions because it gives them power over others, and it helps justify their existence in the organization.  What these managers fail to do is put themselves in the shoes of those trying to do the work.  They don't appreciate the frustrations that they have created.  Moreover, they often do not understand how much they have slowed down the organization.  When approaching these types of processes, managers need to put themselves in the shoes of those on the front lines.  They need to stop thinking about themselves and start thinking about those whom they should be serving.  

Sunday, March 12, 2017

Managerial Career Concerns & Risk Aversion

When we try to understand corporate strategy decisions, we should examine the factors affecting the way executives approach key situations. Specifically, we should seek to comprehend how career concerns might shape strategic choices. Consider the research of Todd Gormley and David Matsa. They conducted an interesting study of over 2,220 firms in which managers learned that government officials had identified something used in their manufacturing process as a carcinogen. The scholars analyzed the strategic choices that followed this discovery.  Here is what they found, according to a summary of the research published by Kellogg Insight. 

“They started buying other firms,” says Matsa. Discovering that their workers had been exposed to a carcinogen was linked to a 6% increase in acquisitions. But critically, acquiring these companies didn’t actually create any value for shareholders. That’s because, rather than making more strategic purchases, the troubled firms overpaid for large and unrelated “cash cows”—firms whose healthy profits might offset any future payouts the company would have to make.

“We likened it to how tobacco firms diversified into food when the health risks of smoking became more pronounced legally,” says Matsa. (Consider, as the most famous example, Phillip Morris’ acquisition of Kraft Foods in 1988.) “The managers were looking for a way to reduce risk.”

Matsa and Gormley argued that that the managers pursued this strategy to reduce their personal exposure. Because their compensation was closely tied to the firm’s performance, their own finances would have been disproportionately hit by the firm’s collapse. And because a catastrophe would likely cost them their jobs, their careers also hung in jeopardy.

Similarly, they studied firms which operated in states that made it difficult for companies to execute hostile takeovers.  They described these firms as "protected" in that managers did not face a high risk of being displaced/terminated by another company undertaking a hostile takeover.   Here is what the research demonstrated about the strategic choices made by these executives in "protected" situations: 

Moreover, just as seen in the previous study, these managers actively reduced risk by pursuing safe, diversification-focused acquisitions. Their firms undertook 27% more acquisitions compared with unprotected businesses—with two-thirds of these transactions diversifying the firms into new industries rather than building on existing strengths. Disproportionately, the firms targeted “cash cows.”  And their caution negatively impacted their companies’ value, investments, and growth. “These incremental acquisitions destroy shareholder value on average,” Matsa says.