As we have discussed in the past, different organizations include different processes and disciplines in Research and Development. We at InspiRD have started using Research, Development and Engineering (RD&E) as a generic term that includes technology development, product development and sustaining engineering.
Integrated management of RD&E can provide immense benefits to organizations…
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A quick post about a lecture by Unilever’s Kees Kruythoff in Knowledge@Wharton (Global Leadership Lessons from Unilever’s Kees Kruythoff ). Kruythoff mentions that a sense of enthusiasm and excitement is key to a company’s success and makes progress possible. He sees that sense of enthusiasm has been a key to his own success:
“Kruythoff said that his enthusiasm for his job has always been what has propelled him. There is really no substitute for that, he noted, and, in reality, enthusiasm should be the primary reason anyone should work for an organization. “When you join a business, the most important part is to ask yourself how you can improve the values of the company,” Kruythoff stated. ”
One way to get an enthusiastic workforce is to hire employees that clearly demonstrate the sense of excitement:
A new employee should have a sense of excitement, he added, and make sure that he or she is a good fit with the company. “Wherever you go, if it feels like the place where you want to be, then in all likelihood it is.”
However, the leaders still need to maintain and fuel that excitement. A sense of excitement will help overcome any hurdles in the organizations path and build a positive environment.
Enthusiasm makes progress possible, Kruythoff said, and leaders must build that excitement and fire among their employees. Not every decision is a winner, but when employees are optimistic about the future of the firm, that atmosphere will help move the company in the right overall direction.
The article does not quite talk about how to build and maintain this sense of excitement. Here is what we have learned in this blog:
An interesting article in the Sloan Management Review discusses a paper that shows what you wear can influence how you perform.
New research suggests that clothing can have an effect on our behavior if that clothing has a symbolic meaning and if we have the physical experience of wearing the clothes.
Three experiments showed that knowing that you are wearing a doctor’s coat actually improved performance:
In the first experiment, the researchers found that wearing a lab coat identified as a doctor’s coat did, in fact, increase subjects’ selective attention. In the second experiment, they found that people who wore the same coat but were told it was a painter’s coat did not have increased attention. And in the third experiment, they found that just looking at a doctor’s coat did not increase attention.
Here is the link to the research paper.
Incentives are key to driving R&D manager behavior. We have often discussed different approaches to improve financial incentives. A new article from McKinsey Quarterly has a unique take on how to evaluate compensations plans (Does the CEO compensation plan provide the right incentives?). The premise is that in addition to the remuneration for the current year, the accumulated wealth from the entire tenure drives executive behavior.
Boards, shareholders, and journalists often look at a chief executive’s annual compensation plan to determine whether the company is offering the right incentives to increase shareholder value. But few consider another key question: how does the compensation that the CEO has already received over the years in the form of stock and stock options influence managerial decision making?
The authors compared the median total annual compensation of chief executives and comparing it with their median total accumulated wealth. Their analysis shows that median accumulated wealth is nine times the year-to-year compensation for a CEO of a large company.
Our research shows that for most CEOs in the United States, accumulated wealth effects are likely to swamp those of year-to-year compensation—meriting serious attention when boards evaluate how risk structures and incentives of executive pay packages align with the company’s strategy.
We have discussed the inability to tie pay to executive performance (See Problem with Financial Incentives). We have also talked about longer vesting periods to better align performance with pay. This article gives a somewhat new perspective that longer vesting periods might actually have a negative impact because the accumulated wealth might start outweighing new compensation.
Another unique perspective in the article is the convexity of the compensation package. If the compensation package is shares, the wealth change is linear with the stock price. Stock options on the other hand increase in value much more rapidly.
If the CEO’s portfolio contains only shares, it will tend to rise and fall one-for-one with a change in stock price. We refer to this as “low convexity.” If, however, the CEO’s portfolio contains a large number of stock options, and especially multiple tranches of out-of-the-money stock options, the payoff curve can become quite steep (high convexity). Convex payoff structures such as these provide more financial incentives for CEOs to take on promising—albeit risky—investments because the CEO stands to earn very large rewards if successful.
Hence, as we have discussed before, stock options encourage risk taking to get to the higher payoff. More risk taking may or may not be advantageous for the company and the board needs to be cognizant of its implications. The article does not address it, but we have discussed the inability of stock options to actually drive good behavior.
So what is the overall recommendation? Understand the accumulated wealth effect before deciding on a compensation plan. This is especially pertinent for a longer term manager who is likely to have accumulated a large wealth. Decide whether you want more risk taking before granting stock options. Finally, benchmark with other companies and industries to decide the appropriate balance.
“Since this analysis is relatively new, and wealth effects aren’t routinely calculated and reported, we suggest boards do some benchmarking against peers to see if it raises questions about the financial incentives they have created for their CEO. Is risk in line with industry peers, and, more importantly, is it in line with the company’s strategic objectives? Have changes in the stock market changed the convexity of the CEO’s reward curve in a way that encourages excessive risk? If so, should the board change the mix of future annual pay grants to get the curve back in line with objectives? Should it reprice existing options to reduce convexity? If the CEO wants to sell or hedge some of his or her personal portfolio in order to reduce personal-investment risk, how will this change the incentives to perform?”
A quick post about an interesting article in the McKinsey Quarterly: The executive’s guide to better listening:
“Listening is the front end of decision making. It’s the surest, most efficient route to informing the judgments we need to make, yet many of us have heard, at one point or other in our careers, that we could be better listeners. Indeed, many executives take listening skills for granted and focus instead on learning how to articulate and present their own views more effectively.”
The article provides three very useful suggestions:
1. Show Respect: We need to trust our colleagues, give them a chance explain their perspective, and more importantly, give them some time to work their way to a solution instead of just providing one to them. May be encourage them to experiment a bit more.
Our conversation partners often have the know-how to develop good solutions, and part of being a good listener is simply helping them to draw out critical information and put it in a new light. To harness the power of those ideas, senior executives must fight the urge to “help” more junior colleagues by providing immediate solutions. Leaders should also respect a colleague’s potential to provide insights in areas far afield from his or her job description.
2. Keep Quiet: Something very hard to do for me, but the rule is to only speak for 20% of the time and keep quite for 80%.
Many executives struggle as listeners because they never think to relax their assumptions and open themselves to the possibilities that can be drawn from conversations with others. … But many executives will have to undergo a deeper mind-set shift—toward an embrace of ambiguity and a quest to uncover “what we both need to get from this interaction so that we can come out smarter.”
… Too many good executives, even exceptional ones who are highly respectful of their colleagues, inadvertently act as if they know it all, or at least what’s most important, and subsequently remain closed to anything that undermines their beliefs.
3.Question Assumptions: It is important to question assumptions (both our own and those of our colleagues to have a meaningful conversation:
So it takes real effort for executives to become better listeners by forcing themselves to lay bare their assumptions for scrutiny and to shake up their thinking with an eye to reevaluating what they know, don’t know, and—an important point—can’t know.
Here is a useful technique to question assumptions:
Duncan uses a technique I find helpful in certain situations: he will deliberately alter a single fact or assumption to see how that changes his team’s approach to a problem. This technique can help senior executives of all stripes step back and refresh their thinking. In a planning session, for example, you might ask, “We’re assuming a 10 percent attrition rate in our customer base. What if that rate was 20 percent? How would our strategy change?
Over the weekend I had a long discussion with a friend about Occupy Wall Street and what is wrong with our corporations. A few themes emerged that may actually be interesting for R&D management as well. It has been shown that executive remuneration has grown much faster than average worker. It is also felt that the pay is disproportionately large.
A key problem with driving executive performance is the inability to tie pay to performance. Decisions made by executives have impact months (if not years) later. So, rewards based on current stock price do little to guide executive performance. Traditional approach has been to provide stock options that vest over a long period. However, stock options have shown to be ineffective in driving performance. This is mainly because the vesting of options does not have a direct relationship to the decisions made by the manager. Stock price in the future will depend on performance across multiple products. Furthermore, options will vest either with time, no matter what happens in the future.
So, here is a proposal: Why not tie rewards to performance based on actual performance of new products developed by a set of executives? R&D executives are responsible for deciding which products to develop and how. The primary and largest reward could be a fraction of the profits generated by these products when they actually reach the market (True Profit Sharing). Most organizations develop (and maintain) a business case for pursing any new product. Hence the executive reward can be built directly into that business case. Boards of directors can monitor performance using the same business case. This approach ties rewards to actual decisions executives make on new product development.
One concern of this approach might be that True Profit Sharing will generate bonuses over a long time frame. Executives are also responsible for managing R&D execution, operations and guiding sales. So, We need other bonuses that encourage performance for near and mid-term. To do that, we can tie a part of bonuses to operational effectiveness:
A quick post about a McKinsey Quarterly article with lots of interesting benchmarking info (Taking organizational redesigns from plan to practice):
Organizations often redesign themselves to unlock latent value. They typically pay a great deal of attention to the form of the new design, but in our experience, much less to actually making the plan happen—even though only a successfully implemented redesign generates value.
There are many reasons why organizational redesigns are risky (or may fail to generate results). Here is a comprehensive list from the article:
This is explained by the results of the survey (not sure how anyone is able to estimate shareholder value generated by a reorg):
“Though a majority of respondents at publicly traded companies say their redesigns increased shareholder value, only a very small group of respondents—8 percent of those who have been through a redesign—say their efforts added value, were completed on time, and fully met their business objectives.
Here are some key takeaways: 1) Good reorgs take less than six months to implement; 2) they have clearly defined goals and objectives; 3) focus on how the new org would work (not just how it would look); 4) determine how the org cultures, processes, tools, roles and changed; and 5) leadership is fully engaged in change and not fighting it.
A key to success seems to be clear objectives on what the reorg is supposed accomplish (detailed goals about how the org will work, not just how it would look). Here is some data about the importance of defining detailed goals:
Respondents are much likelier to say their organizations set broad goals than detailed ones for their redesigns (Exhibit 1). Notably, this is true even of redesigns that could have had very specific numeric goals.
Over the weekend I had a long discussion with a friend about Occupy Wall Street and what is wrong with our corporations. A few themes emerged that may actually be interesting for R&D management as well. It has been shown that executive remuneration has grown much faster than average worker. It is also felt that the pay is disproportionately large.
A key problem with driving executive performance is the inability to tie pay to performance. Decisions made by executives have impact months (if not years) later. So, rewards based on current stock price do little to guide executive performance. Traditional approach has been to provide stock options that vest over a long period. However, stock options have shown to be ineffective in driving performance. This is mainly because the vesting of options does not have a direct relationship to the decisions made by the manager. Stock price in the future will depend on performance across multiple products. Furthermore, options will vest either with time, no matter what happens in the future.
So, here is a proposal: Why not tie rewards to performance based on actual performance of new products developed by a set of executives? R&D executives are responsible for deciding which products to develop and how. The primary and largest reward could be a fraction of the profits generated by these products when they actually reach the market (True Profit Sharing). Most organizations develop (and maintain) a business case for pursing any new product. Hence the executive reward can be built directly into that business case. Boards of directors can monitor performance using the same business case. This approach ties rewards to actual decisions executives make on new product development.
One concern of this approach might be that True Profit Sharing will generate bonuses over a long time frame. Executives are also responsible for managing R&D execution, operations and guiding sales. So, We need other bonuses that encourage performance for near and mid-term. To do that, we can tie a part of bonuses to operational effectiveness:
Knowledge@Wharton Research Roundup has some interesting learning about team performance. Increasing team size improves performance, but reduces team member satisfaction:
When it comes to teams, less is sometimes more. In a recent paper, Wharton management professor Jennifer Mueller found that while larger teams generally are more productive overall than smaller ones, members of the bigger groups were less fruitful individually than their counterparts on the smaller teams.
There are thought to be three major challenges to effectiveness of large teams:
Based on study of 26 teams with 238 team members, the author found significant support for challenges 2 and 3 (but not for 1). The article of team satisfaction has potential solutions to these challenges.
We have often discussed problems with financial incentives. It has been shown that stock options lead to excessive risk taking. Corporate Executive board suggest we ask the following question in Exec Comp: The Ultimate Decider:
Will this executive compensation policy provide meaningful incentives for executives to create long-term shareholder wealth without incurring excessive risk?
Their suggestion is to keep the following in mind – it is a pretty good list:
- Calibrating Compensation: The ideal exec comp plan is less about motivation than about providing guidance to executives as they navigate ambiguous decisions.
- No Silver Bullets: Do not put faith in any one policy, such as mandatory share ownership, for aligning executive and investor incentives. Use a mixture of long-term metrics appropriate for your company.
- Reasonable Ceilings: While setting stretch targets for annual variable cash compensation, high performers also impose a reasonable ceiling to discourage unchecked risk taking.
- Longer Vesting: The executive labor market is increasingly converging on longer vesting periods of four or more years.
- Balanced Equity Vehicles: Executives can over-optimize to any individual metric, including share price. Embrace some extra complexity to encourage a more three-dimensional view of firm performance.
- Objective Performance Measures: Reduce the role of board discretion in your compensation; use more objective metrics, even for soft factors like customer satisfaction and employee engagement.
Clearly this is hard to do, but as Prof. Kaplan pointed out, “If you have high power incentives, you’d better have even higher power controls.”