Discover more from Course Notes: Continuous Business Learning
Everything is Obvious 9/10
We treat people who drive drunk and not kill anyone (or damage property) way more leniently than those who do (and eventually get caught and put to trial) – all because of the consequences of such reckless behaviour. But unless the death/injury/damage is intentional, it’s “simply” bad luck for everyone involved. Violators of rules and laws can and usually do get punished as an example – but for the purpose of sending a message to the community about what’s right and what’s wrong, not to punish specific individuals involved per se.
Let’s not forget the Halo Effect where the quality of the process followed is determined by the perceived quality of the outcome. Since there are almost no opportunities to try the decision again with a different set of inputs, the best way to evaluate the process is to focus on the process itself, ignoring the overwhelming impact of the outcome. It’s important to separate plans from outcomes, because good plans can lead to bad outcomes and vice versa.
“Pay for performance” and “pay for failure” are two sides of the same coin: people get compensated or punished based on how their firms/divisions perform, while their professional value is derived from the outcomes of their employer, not the other way around. Many performance plans are structured in a way that the most an employee can lose is the job and/or a bonus (the downside is capped), while receiving outsized performance bonuses if things go the right way (uncapped or highly capped upside).
Using benchmarking for the purpose of compensation is a tricky thing: many companies claim to do it, but somehow, they choose the convenient cohort of peers which they would invariably outperform. [MK: this is exactly the conflict of interests that the Boards should be able to pick up.] If every company that benchmarks itself against a peer group pays performance bonuses, there has to be something fishy about the selection process after all.
The “luck vs talent” debate never ends; there are streaks of several lucky years in a row, which smart political managers use to their advantage – whether to beef up the comp package, to get more responsibilities and impact or simply to trampoline to a higher role elsewhere.
[MK: I’d like to add that most of the time the key reason for an extensive streak of good performance is the good old fraud – be it the Ponzi scheme or creative accounting.]
While assessing someone’s capability over a period of time it’s important to understand that serial accomplishments are not independent of each other: they build on top of each other. In other words, 10 years’ worth of accomplishments may easily be 1 year worth of accomplishments repeated 10 times.
“The Matthew Effect” (from the Bible): the more one has - the more one gets. Individuals with otherwise similar initial starting conditions demonstrate very different outcomes 10 years down the road simply based on their employers, resources available or projects being worked on. Once one’s “success” starts emerging, the person becomes more likely to attract better jobs or projects, etc. This explains the disproportionate “success” of the individuals who got into the right place at the right time.
This goes against the principle of meritocracy, but over time university graduates entering the workforce during a weak economy will suffer from the difference in the initial conditions.
Common sense brings us extreme examples of no-good people who will never amount to anything or the smartest people who will never have troubles getting highly paid jobs. The truth is that most of us fall in between these extremes, where the common sense is misleading, and randomness + cumulative advantage define our outcomes.
It’s tempting (but misleading) to think that one’s unique attributes determine their observable outcomes. [MK: And there’s no way to know from the outside what particular combination of luck/skill has played a role.]
MK: The book goes on to explain that the performance of the organization can’t be attributed to a single individual (think Apple and Steve Jobs), but it’s already a cliché, so let’s skip this part. Please read my summary of the book “In Search of the Corporate Saviour” for more.
“Fairness” is in the eye of the beholder, but the author makes a compelling argument when it comes, for instance, to the “fairness” of the exorbitant salaries in the banking industry. Focusing on individuals is futile as they earn exactly how much the industry can give them; it’s the overall profits of the industry (meaning, of course, how much banks can be leveraged or what sort of exposure to the high-risk assets is tolerable, etc.) that are worth looking at and probably regulated. If the society is better off at the expense of the banking industry – may there’s a case for regulation. However, banking industry lobby keeps this “socialist” proposal safely away from lawmakers.
The presence of the status quo doesn’t imply that it’s “fair”. Resistance to any redistribution of wealth is considered moral as it maintains the existing order. For the avoidance of doubt, any “order” in economic and human systems is far from “natural” as it reflects a combination of lots of factors over the course of years and decades. Change should be assessed based on the merit and the expected outcomes, not on the dogma that any change is undesirable.
Once a system has attained a certain level of complexity, there’s no way to rule out the possibility of failure. [MK: please also have a peek at John Quiggin’s wonderful piece on why the highly praised Australian quarantine system has failed.] Systemic failures will inevitably occur, so preparation is essential.
Of course, when the industry is “too big to fail”, in good times it boasts high profits because of the wise leadership of its firms; when times are not so good – they are the first to beg the government with a hat in their hand, claiming to be an essential part of the overall economy, which will otherwise collapse. There’s hardly any “fairness” in such dualism.
Our notions of justice must deal with the inevitable tension between the individual and the society as a whole. Our individual actions are embedded in the networks of social relations, which should be governed by the overall purpose – of institutions, firms and things in general. The purpose is something the members of the society must decide collectively; fairness is a product of society. It’s not to say that society knows everything or can’t be manipulated (think of banks hiding systemic risks for the purpose of increasing profits).