Bonuses yet again

Alex Goodall, over at A Swift Blow to the Head, has written another angry post about the bonuses paid to financial sector staff. I’ve been in several minds about responding, since my views seem to be decidedly minority ones in our present environment, and because there seems to be so much anger abroad on this topic.  But so much that is written and said, including by intelligent, reasonable people such as Alex, mis-understands the topic, that I feel a response is again needed.  It behooves none of us to make policy on the basis of anger and ignorance.
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HR runs amuck in NSW

The Sydney Morning Herald tomorrow reports that staff at the New South Wales Law Reform Commission are being invited to apply for their own positions.   Apparently, the current staff there are staying in their posts too long, thereby reducing staff turnover, with the serious consequence that: 

Zero turnover means that no opportunities arise to attract, develop or retain highly skilled employees.”  

It’s always the damn employees who cause trouble for the proper functioning of the Human Resources Department.   How can HR possibly execute policies to retain valuable staff if nobody ever threatens to leave!?

Shame!

Visiting my local dojo this week, I saw an advert for a Workaholics Anonymous meeting that also takes place there.  They meet fortnightly, on Saturdays from 10 am to 12 noon. What  a pity, since Saturday mornings are my most productive work-times of the week!

Commuting in the age of email

If you believe, as the prevailing social metaphor would have it, that this is the Age of Information, then you could easily imagine that the main purpose of human interactions is to request and provide information.  That seems to be the implicit assumption underlying Lane Wallace’s discussion of commuting and working-from-home here.   Wallace is surprised that anyone still travels to work, when information can be transferred so much more readily by phone, email and the web.
But the primary purpose of most workplace interactions is not information transfer, or this is so only incidentally.  Rather, workplace interactions are about the co-ordination of actions — identifying and assessing alternatives for future action, planning and co-ordinating future actions, and reporting on past actions undertaken or current actions being executed.    To engage in such interactions about action of course involves requests for and transfers of information.    To the extent that this is the case, such interactions can be and indeed are undertaken with participants separated in space and time.   But co-ordination of actions requires very different speech acts to those (relatively simple) locutions seeking and providing information:  speech acts such as proposals, promises, requests, entreaties, and commands.  These speech acts have two distinct and characteristic features — they usually require uptake (the intended hearer or actor must agree to the action before the action is undertaken), and the person with the power of retraction or revocation is not necessarily the initial speaker.   An accepted promise can only be revoked by the person to whom the promise is made, for instance, not by the person who made the promise. So, by their very nature these locutions are dialogical acts, not monolectical.   You can’t meaningfully give commands to yourself, for example, and what value is a promise made in a forest?  Neither of these two features apply to speech acts involving requests for information or responses to requests for information.
In addition, inherent in speech acts over actions is the notion of intentionality.    If I promise to you to do action X, then I am expressing an intention to do X.  If your goals requires that action X be commenced or done, then you need to assess how sincere and how feasible my promise is.  Part of your assessment may be based on your past experience with me, and/or the word of others you trust about me (my reputation).   Thus it is perfectly possible for you to assess my capability and my sincerity without ever meeting me.  International transactions across all sorts of industries have taken place for centuries between parties who never met; the need to assess sincerity and capability is surely a key reason for the dominance of families (eg, the Rothschilds in the 18th and 19th centuries) and close-knit ethnic groups (eg, the Chinese diaspora) in international trade networks.  But, if you don’t know me already, it is generally much easier and more reliable for you to assess my sincerity and capability by looking me in the eye as I make my promise to you.
Bloggers and writers and professors, who rarely need to co-ordinate actions with anyone to achieve their work goals, seem not to understand these issues very well.  But these are issues are known to anyone who actually does anything in the world, whether in politics, in public administration or in business.   One defining feature of modern North American corporate culture, in my experience, is that most people find it preferable to make promises of actions even when they do not yet have, and when they know that they do not yet have, the capabilities or resources required to undertake the actions promised.  They do this rather than not make the promise or rather than making the promise conditional on obtaining the necessary resources, in order to appear “positive” to their bosses.   This is the famous “Can Do” attitude at work, and I have discussed it tangentially before in connection with the failure of the Bay of Pigs;  its contribution to the failures of modern American business needs a separate post.

Bonus culture-vultures

Since this post is certain to be controversial, let me state some things at the outset for the avoidance of any doubt:

  • Owners of companies have the legal and moral right to establish any legal payment policies they so wish.  Thus, if the econopopulists now living at 10 and 11 Downing Street, London, wish to abolish bonus payments to managers at the banks our government owns, then they have every right to do so.   As company owners, they do not need to give reasons for their actions.   As elected officials in a democracy, however, rational justification and evidence of due deliberation behooves them.
  • People who fail should not be rewarded for that failure.  Those who placed bad bets on house prices or credit swaps should not receive financial rewards for their bad bets.

But in all the Grand Populist Upswelling of Outrage (GPUO) fed or created by the media in Britain, in France and the USA (and maybe elsewhere) this last week over bonus payments to managers in the financial sector, there are some aspects which I’ve either seen little of, or not seen reported at all.

  • The first is that not all business units of all banks and financial institutions failed, these last 6 or 18 months.   Some parts of even the bankrupt banks made profits, sometimes large profits.  The managers who made those profits, particularly at a time of global economic doom, deserve whatever bonus payments they were promised.
  • Second, many bonus payments are subject to legally-binding employment contracts.  Any half-decent financier would not have accepted a senior position without first having a written, legally-binding statement of what he or she was owed in payment under what circumstances.  New owners or not, even owners living in Downing Street, have a legal and moral obligation to fulfil legally-binding contracts.
  • Finally, in all the nonsense spoken about a “bonus culture” in banks, I have nowhere seen any discussion as to WHY bonus payments are common in the financial world.   The first reason is that financial markets are capricious:  despite all the boastful talk about skills and experience, and despite the multi-terabytes of computer memory, the massively-high bandwidths of connection, and the arrays of rocket scientists deployed, the taking of positions in markets is still a matter of taking views on the future, and betting these views against other views.   The future is uncertain, so bets can lose, as well as win,  and these two outcomes may happen regardless of the skills or expertise or resources applied to the taking of a view.  People may be just lucky or unlucky – even clever, experienced, well-resourced, cautious, nice people.    The second reason is that when bets win, they may win big.    If  a company makes hundreds of millions of dollars profit from a one or a handful of trades, it can seem most unfair to those deciding what trades to do that all of this capricious, windfall gain should accrue just to the shareholders.  Those doing the trading therefore ask, quite reasonably in my opinion, for a share of this windfall gain.   Most companies have then a choice:  give a few percent of these capricious windfalls to the staff doing the work as bonus payments, or risk losing the staff to the competitor down the street who will.   No rational, long-term manager would choose the latter option, and no rational, long-term shareholder would force him or her to.

Nothing in what I have written here should lead you to conclude that I consider the occupants of 10 and 11 Downing Street to be rational, long-term managers of the companies our Government owns.  The occupants of Downing Street, it seems to me, have their eyes firmly fixed on the next election, and the Government’s re-election thereat, and pretty-much nothing else.    Neither rationality nor long-termism feature in such gazing, sadly.  If it did, we would be reading in our media the details of the new, 20-year, national infrastructure projects about to commence – thereby creating domestic UK employment, supporting local supplier firms, supporting demand, and providing a basis for future prosperity –  and not econopopulist nonsense about stopping bonuses to bankers.  Can anyone even name, let alone describe, a single infrastructure project that the UK plans to embark upon now?
POSTSCRIPT (2009-03-29):  The International Herald Tribune has carried an oped article by Jake DeSantis, comprising a letter to resign his position as an executive vice president of the American International Group’s financial products unit.  His letter examplifies my first bullet point above:  not all business units of failed financial institutions were or are failing, and it is unfair and irrational to punish those still successful.  Punishment is irrational both tactically – since offended staff will soon leave – and strategically – since failed institutions still operating need to have some successful product lines to stay in business.

“As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house. “

Retroflexive decision-making

How do companies make major decisions?  The gurus of classical Decision Theory – people like economist Jimmie Savage and statistician Dennis Lindley – tell us that there is only one correct way to make decisions:  List all the possible actions, list the potential consequences of each action, assign utilities  and probabilities of occurrence to each consequence, multiply these numbers together for each consequence and then add the resulting products for each action to get an expected utility for each action, and finally choose that action which maximizes expected utility.
There are many, many problems with this model, not least that it is not what companies – or intelligent, purposive individuals for that matter – actually do.  Those who have worked in companies know that nothing so simplistic or static describes intelligent, rational decision making, nor should it.  Moreover, that their model was flawed as a description of reality was known at the time to Savage, Lindley, et al,  because it was pointed out to them six decades ago by people such as George Shackle, an economist who had actually worked in industry and who drew on his experience.  The mute, autistic behemoth that is mathematical economics, however, does not stop or change direction merely because its utter disconnection with empirical reality is noticed by someone, and so – TO THIS VERY DAY – students in business schools still learn the classical theory.  I guess for the students it’s a case of:  Who are we going to believe – our textbooks, or our own eyes?    From my first year as an undergraduate taking Economics 101, I had trouble believing my textbooks.
So what might be a better model of decision-making?  First, we need to recognize that corporate decision-making is almost always something dynamic, not static – it takes place over time, not in a single stage of analysis, and we would do better to describe a process, rather than just giving a formula for calculating an outcome.   Second, precisely because the process is dynamic, many of the inputs assumed by the classical model do not exist, or are not known to the participants, at the start, but emerge in the course of the decision-making process.   Here, I mean things such as:  possible actions, potential consequences, preferences (or utilities), and measures of uncertainty (which may or may not include probabilities).     Third, in large organizations, decision-making is a group activity, with inputs and comments from many people.   If you believe – as Savage and Lindley did – that there is only one correct way to make a decision, then your model would contain no scope for subjective inputs or stakeholder revisions, which is yet another of the many failings of the classical model.    Fourth, in the real world, people need to consider – and do consider – the potential downsides as well as the upsides of an action, and they need to do this – and they do do this – separately, not merged into a summary statistic such as “utility”.   So, if  one possible consequence of an action-option is catastrophic loss, then no amount of maximum-expected-utility quantitative summary gibberish should permit a rational decision-maker to choose that option without great pause (or insurance).   Shackle knew this, so his model considers downsides as well as upsides.   That Savage and his pals ignored this one can only assume is the result of the impossibility of catastrophic loss ever occurring to a tenured academic.
So let us try to articulate a staged process for what companies actually do when they make major decisions, such as major investments or new business planning:

  1. Describe the present situation and the way or ways it may evolve in the future.  We call these different future paths scenarios.   Making assumptions about the present and the future is also called taking a view.
  2. For each scenario, identify a list of possible actions, able to be executed under the scenario.
  3. For each scenario and action, identify the possible upsides and downsides.
  4. Some actions under some scenarios will have attractive upsides.   What can be done to increase the likelihood of these upsides occurring?  What can be done to make them even more attractive?
  5. Some actions under some scenarios will have unattractive downsides.   What can be done to eliminate these downsides altogether or to decrease their likelihood of occurring?   What can be done to ameliorate, to mitigate, to distribute to others, or to postpone the effects of these downsides?
  6. In the light of what was learned in doing steps 1-5, go back to step 1 and repeat it.
  7. In the light of what was learned in doing steps 1-6, go back to step 2 and repeat steps 2-5.  For example, by modifying or combining actions, it may be possible to shift attractive upsides or unattractive downsides from one action to another.
  8. As new information comes to hand, occasionally repeat step 1. Repeat step 7 as often as time permits.

This decision process will be familiar to anyone who has prepared a business plan for a new venture, either for personal investment, or for financial investors and bankers, or for business partners.   Having access to spreadsheet software such as Lotus 1-2-3 or Microsoft EXCEL has certainly made this process easier to undertake.  But, contrary to the beliefs of many, people made major decisions before the invention of spreadsheets, and they did so using processes similar to this, as Shackle’s work evidences.
Because this model involves revision of initial ideas in repeated stages, it bears some resemblance to the retroflexive argumentation theory of philosopher Harald Wohlrapp.  Hence, I call it Retroflexive Decision Theory.  I will explore this model in more detail in future posts.
References:
D. Lindley [1985]:  Making Decisions.  Second Edition. London, UK: John Wiley and Sons.
L. J. Savage [1950]: The Foundations of Statistics.  New York, NY, USA:  Wiley.
G. L. S. Shackle [1961]: Decision, Order and Time in Human Affairs. Cambridge, UK:  Cambridge University Press.
H. Wohlrapp [1998]:  A new light on non-deductive argumentation schemes.  Argumentation, 12: 341-350.

Extreme teams

Eric Nehrlich, over at Unrepentant Generalist, has reminded me of the book “The Wisdom of Teams“, by Jon Katzenbach and Douglas Smith, which I first read when it appeared in the early 1990s.   At the time, several of us here were managing applications for major foreign telecommunications licences for our clients – the fifth P (“Permission”) in telecoms marketing.
Before Governments around the world realized what enormous sums of money they could make from auctioning telecoms licences, they typically ran what was called a “beauty contest” to decide the winner.     In these contests, bidders needed to prepare an application document to persuade the Government that they (the bidder) were the best company to be awarded the licence.  What counted as compelling arguments differed from one country to another, and from one licence application to another.   The most common assessment criteria used by Governments were:  corporate reputation and size, technical preparedness and innovation, quality of business plans, market size and market growth, and the prospects for local employment and economic development.
As I’m sure you see immediately, these criteria are multi-disciplinary.  Licence applications were (and still are, even when conducted as auctions) always a multi-disciplinary effort, with folks from marketing, finance, engineering, operations, legal and regulatory, folks from different consortium partners, and people from different nationalities, all assigned to the one project team.  In the largest application we managed, the team comprised an average of about 100 people at any one time (people came and went all the time), and it ran for some 8 months.   In that case, the Government tender documents required us to prepare about 7,000 original pages of text in response (including detailed business plans and blue-prints of each mobile base station), multiplied by some 20 copies.    You don’t win these licences handing in coffee-stained photocopies or roneoed sheets.  Each of the 20 volumes was printed on glossy paper, hard-bound, and the lot assembled in a carved tea chest.
Work on these team projects was extremely challenging, not least because of the stakes involved.  If you miss the application submission deadline even by 5 minutes, you were out of the running.    That would mean throwing away the $10-20 million you spent preparing the application and upsetting your consortium partners more than somewhat.   If you submit on time, and you win the licence, you might see your company’s share-market value rise by several hundred million dollars overnight, simply on the news that you had a won a major overseas mobile licence.  $300 million sharevalue gain less $20 million preparation costs leaves a lot of gain.   In one case, our client’s share-market value even rose dramatically on news that they had LOST the licence!  We never discovered if this was because the shareholders were pleased that the company (not previously in telecoms) had lost and was sticking to its knitting, or were pleased that the company had tried to move into a hi-tech arena.
With high stakes, an unmovable deadline, and with different disciplines and companies involved, tempers were often loose.   One of the major differences between our experiences and those described in the Katzenbach and Smith book is that we never got to choose the team members.  In almost all cases, Governments required consortia to comprise a mix of local and international companies, so each consortium partner would choose its own representatives in the team.  Sometimes, the people assigned knew about the telecoms business and had experience in doing licence applications; more frequently, they knew little and had no relevant experience.  In addition, within each consortium partner company, internally powerful people in the different disciplines would select which folks to send.   One could sometimes gauge the opinion of the senior managers of our chances by the calibre of the people they chose to allocate to the team.
So — our teams comprised people having different languages, national cultures and corporate cultures, from different disciplines and having different skillsets and levels of ability, and sent to us sometimes for very different purposes. (Not everyone, even within the same company, wanted to win each licence application.)  Did I mention we normally had no line authority over anyone since they worked for different divisions of different companies?  Our task was to organize the planning work of these folks in a systematic and coherent way to produce a document that looked like it was written by a single mind, with a single, coherent narrative thread and compelling pitch to the Government evaluators.
Let us see how these characteristics stack up against the guidelines of Katzenbach and Smith, which Eric summarized:

  • Small size  – Not usually the case.  Indeed, many of the major licence applications could not physically or skill-wise have been undertaken by just a small team.  These projects demanded very diverse skills, under impossibly-short deadlines.  The teams, therefore, had to be large.
  • Complementary skills – Lots of different skills were needed, as I mention above.  Not all of these are complementary, though.  I am not sure how much lawyers and engineers complement each other; more often, their different styles of thinking and communicating (words vs. diagrams, respectively) and their different objectives would have them in disagreement.
  • Common purpose – In public, everyone had the same goal — to win the licence.  In private, as in any human organization, team members and their employers may have had other goals.  I have seen cases where people want to lose, to prove a point to other partners, or because they do not feel their company would be able to deal with too many simultaneous wins.   I have seen other cases where people do not want to win (not the same as wanting to lose) — they may be participating in order to demonstrate, for example, that they know how to do these applications.
  • Performance goals – Fine in theory, but very hard in practice when the team leaders do not have line responsibility (even temporarily) over the team members.
  • Common approach – Almost never was this the case.  Each consortium partner, and sometimes each functional discipline within each consortium partner had their own approach.  There was rarely time or resources to develop something mutually acceptable.  In any case, outputs usually mattered more than approach.
  • Mutual accountability – Again, almost never the case, partly due to the diversity of real objectives of team members, divisions and partners.
  • Despite not matching these guidelines, some of the licence application teams were very successful, both in undertaking effective high-quality collaborative work and in winning licences.  I therefore came away from reading “The Wisdom of Teams” 15 years ago with the feeling that the authors had missed something essential about team projects because they had not described my experiences in licence applications.  (I even wrote to the authors at the time a long letter about my experiences, but they did not deign to reply.) I still feel that the book misses much.

    Run-time marketing

    Although mobile communications (mocoms) began primarily as a service for business users and rich individuals, for over a decade mocoms have attracted a mass consumer audience.   Perhaps for this reason, it is often the case that mocoms marketing folk have cut their baby teeth in the fmcg sector — those consumer goods that move off the shelves so fast that only a short, unpronounceable acronym with all the vowels deleted to save time would keep up with them.    But there are many differences between telecommunications and other consumer products and services, and, despite having pre-cut teeth, these imports don’t always cut the mustard.
    We have long tried to identify these differences, and the key difference seems to be the time at which the product is created.     If you sell chocolate bars, you make them in a factory, deliver them to a store, and sell them to consumer.  The product is created before it leaves the factory door.   If you sell draught beer, the product is partly created before it leaves the factory (that would be the “beer” part of “draught beer”), but also partly created at the time the service is purchased (the “draught” part).   So a publican who waters down the beer he or she sells will alter the quality experienced by the end-user.
    But telecoms services are not created beforehand, and they are not even created at the time of purchase; instead, they are created at the time of use.  Provision of a network and its level of quality are created and re-created each and every customer call, and not even just once per call, but repeatedly throughout a call.  As a cellular phone user moves around during a call, for instance, his or her call will be routed through different cells, and these may vary widely in quality of service — for example, due to the presence or absence of other, simultaneous users in each cell.   This is quality of service generated on-the-fly, at runtime, to use some computer-speak.  And, as with all marketing, perceptions matter far more than reality:   if customers expect a network to be congested they may be more accepting of quality of service problems than if they’ve been led to think they will be the only users of it.
    Lots of fmcg folks don’t see the difference with their prior world.  Marketing can’t simply order the folks in the factory to ensure good quality product, and then sit back, gin and tonics in hand, to commission a few TV spots.  Instead, Marketing has to ensure that customer expectations are set and re-set realistically to match the quality of service being generated by Engineering as the network operates.  For new networks, add, “and as the network rolls out”.    Marketing have to monitor customer expectations and perception of network quality and compare with actual network quality in real-time, and adjust campaign tactics as they do so.  Marketing, too, has to be generated, on-the-fly.  It’s a lot harder than selling candy.

    Method marketing

    Montgomery Clift in the film “I Confess” Method acting (aka “The Method”) is an approach to acting in which the actor tries to recreate and inhabit the emotional and psychological world of the person he or she is portraying.   The approach was originally created by the Russian theatre director Constantin Stanislavksi,  and is premised on the actor not merely “acting”, but “being” the character.   If done successfully, the method can lead to great authenticity in performance.  But not everyone accepts this approach.  There is a wonderful story of method actor Montgomery Clift, pictured here, on the set of Alfred Hitchcock’s 1953 film, I Confess, being asked by the director to stand by a window so that the cameraman could take a quick external shot of him looking through the window.  Clift asked what his character would be thinking as he looked out the window.  Hitchcock replied, Who the hell cares!, or words to that effect.  The two argued, with Clift thinking that motivation and character was all, while Hitchcock just wanted his picture finished. (Hitchcock also preferred actors who left all the thinking to him, and so it is not surprising that he and Clift never worked together again.)
    I believe the same authentic empathy is required for good marketing, and marketers have to fully inhabit the world of their target customers.   If the target customers are the same social class or ethnic group as the marketers themselves, then such Method Marketing probably comes without awareness — marketers are selling to people like themselves.  But often marketers are not themselves part of the target audience, and have to struggle to understand their customers and their environments profoundly.     Global companies that do this well, such as Unilever, are often thought by others to have “gone native”, allowing local managers great autonomy.    Local autonomy, of course, does not guarantee empathy with local customers, but it certainly is necessary.
    A situation I have experienced several times is a company from a developed country launching a subsidiary in a developing market.   The latest marketing technology is deployed, including customer database systems and marketing data warehouses, to support customer profiling, friends and family programs, affinity marketing, the whole shebang.  All this advanced technology requires air-conditioned offices and needs people with advanced skills to deploy and operate.   Even if these people are local (and many are), they too sit in the air-con offices in the downtown skyscrapers in the capital city.     An environment less like that of the target customers is hard to imagine.   Although local marketers, usually with relatives in the villages, the kampongs and the favelas, will quickly realize the authenticity challenges here, they often have a hard time persuading their western-world masters that a problem exists.
    The strangest example I ever witnessed was a long-winded discussion in a start-up mobile phone company in a developing country in Asia about whether to bill calls by the second or by the minute.   The intended target market were people living in rural towns and villages. No one in the room seemed to appreciate that most of the target customers did not wear watches.