0:11
So if we review some of these things that we've seen, when we're
looking at now this question of an evaluation scheme like this, not from the
top down, which is to say, a sort of straightforward view of how it
might optimize firm outcomes, by doing things
like establishing monitoring controls and boosting productivity.
But from the lateral point of view, from the point of
view that is triggered by our evaluation of the Roman grain trade,
which is to say how can you
control for agency costs, absent effective monitoring mechanisms.
And that in turn invites us to ask
the question where do people's primary incentive lie?
When we answer that question that people's primary incentive
lies in avoiding termination, we see the consequences from that.
What does that do for firm outcomes?
A firm that systematically discourages risk taking,
a firm that discourages the clustering of talent.
A firm which encourages its employees to identify a kind of baseline
metric relative to the performance of their peers, and work to that.
1:21
This we would call the critical perspective on managers,
because this is a management decision, is it not, right?
This is a decision that management takes in
order to control for agency costs within the organization.
No good manager is going to show up to work one day, Monday morning at 9 a.m.,
and say, what is the best scheme that I can think
of to, discourage my firm from taking risks, to ensure that talent
in my firm stays well apart from one another, to try
and foster an environment which no one wants to collaborate with anybody.
To try and set up a benchmark where people identify the bare minimum
they need to do in order to get by, and won't do much more.
Where people are kind of pissed off, nervous and anxious all the time.
What's the best way for me to achieve that for my organization,
because that sounds pretty great. No one's going to say that, right?
Which means that people who have put this place, this system in place
are unlikely to have thought about it from this lateral point of view.
In other words, they're unlikely to have thought about
the agency problem in the way that the Roman
grain trade case invites us to think about it,
which is, how do I establish trust, reputation, positive incentive?
Instead, they're thinking top-down,
what is the best monitoring scheme that I can
put into place in order to keep those costs minimized?
But when we look at it from that first point of view, from that
lateral point of view we start to
see, any number of unintended, perhaps unintended outcomes.
So why firms do it?
Why do they, why do so many of
the world's leading firms implement a scheme like this?
Jack Welch in 2000 I believe when he was the, the CEO
of GE, wrote on newsletters to shareholders, they have a scheme
like that, and he said it's fundamental to our firm's success.
This is one of the ways that we can retain our
competitive advantage maintain the edge that we have in the market.
Why would someone like Jack Welch, a very smart
guy, why would he in a letter to his shareholders,
identify this, take the time to actually single this out
as being one of the reasons to explain GE success.
What do the firm, what do the firms think
they're achieving in this, with this. And
4:38
Because perhaps there is on the other
side some robust statistical evidence from social
scientists showing optimal firm outcomes for those
firms that choose to employ this scheme.
But when you go looking into that literature what you
find is that the few studies that exist that discuss this,
exist purely using baseline models.
There are no real world examples that demonstrate
optimal firm outcomes using a forced ranked distribution scheme.
And even though studies which based on models predict perhaps a boost
of productivity in firm performance, find it that boost, of that productivity boost
is limited, last maybe a year or two years, which makes sense,
which is to say once you've gotten rid of all the dead weight,
your firm, your firm's performance will be enhanced, but thereafter you don't see or
you don't predict according to the model any particularly substantial improvement.
6:14
I'm going to suggest to you the answer to that
is, one, it just seems like a good idea.
If I go to you and I say, look, I've got this great scheme.
And you're going to be able to constantly promote
talent, and constantly remove slackers and complacent employees.
And you're going to be constantly
rejuvenated, and you're going to send great
signals to the market, and it's going to lead to wonderful results.
What are you going to say? Well, do that!
That's perfect! That's exactly what I'm trying to achieve.
6:50
Are you then likely to adopt it? And the answer is yes.
Because all you'll see are the positive outcomes that, that, that occur.
And I suggest the reason why so many firms do it is essentially a network effect.
Once one firm starts to do it you'll start to see
many firms do it because it creates a kind of fear.
Good heavens the guy down the street is now stack ranking his employees.
I better do that too.
Otherwise I might lose my competitive edge.
And that network effect seems to have taken hold.
And so what we find is that an
essentially unproven idea has taken hold of, or has become
embedded, as a good management principle for controlling agency costs.
Despite the fact that our Roman grain trade case would
predict that it's a bad way for controlling agency costs.
Because the Roman grain trade case suggests you
don't need that kind of coercive monitoring mechanism.
Instead you want mechanisms that foster trust
and reputation amongst your employees, because that's the
best way to align incentives.
Incentives that are aligned through fear of being
fired are not going to be as effective as
incentives that align based on a desire to
produce or to participate in a shared reputational mechanism.
7:58
whether, in fact, unambiguously, one is better than the other.
But if you compare firms that do employ stack and rank like Microsoft, and
you put them up against companies that
don't, like Google, it's not clear, I think,
to any of us, that we're necessarily seeing
unambiguous better performance in one than the other.
And so absent clear empirical evidence that this should be the case, it
invites us to go back and to question, why do we do this?
And if we simply do something because it seems like a good idea without
considering why it's a good idea from
every possible angle, and only implementing it after
we have made that consideration, we are not engaging in good management practice.
That is an example of management failure.
8:39
And this is what we need to avoid, this is what firms
need to avoid, they need to avoid that kind of failure, and you
avoid that kind of failure by coming at the questions, at the problems
that you need to solve, in the widest and most informed way possible.
If you simply look at something from the top
down, and you forget to consider it from other perspectives,
you are unlikely to be able to project all
of the potential consequences for the decisions that you're taking.
And yet that is the role of a good management.
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