Research on employee rankings

Posted by Marc Hodak on August 18, 2010 under Revealed preference, Unintended consequences | Be the First to Comment

Theory:  Ranking employees, and letting them know where they rank, inspires a competition to improve one’s performance, or to continue to excel.

Experimental result: Not

[Professor] Barankay [of Wharton] randomly divided workers into two groups — a control group receiving no ranking and a treatment group receiving feedback with a ranking. He then sent an e-mail to all of the workers inviting them to return to do more assignments. The content of all the e-mails was the same, except that individuals in the treatment group found out how they ranked in terms of their answers’ accuracy. The aim was to determine whether giving people feedback affected their desire to do more work, as well as the quantity and quality of their work. Of the workers in the control group, 66% came back for more work, compared with 42% in the treatment group. The members of the treatment group who returned were also 22% less productive than the control group.

Prof. Barankay also offered workers either a job where they would be ranked or one where they wouldn’t be.

[T]he job without the feedback attracted more workers — 254, compared with 76 for the job with feedback.

“This was a surprising outcome, but it speaks to the paradigm of revealed preferences,” he notes. “Economists are usually very skeptical about what people say they will do. We focus on what people actually choose to do. Their choices convey information about what they care about. In this case, it seems that people would rather not know how they rank compared to others, even though when we surveyed these workers after the experiment, 74% said they wanted feedback about their rank.”

So, people generally don’t like to be ranked against their peers, even though they say they do, and rankings appear to encourage the high performers to slack off and the poor performers to give up.  Contrary to theory, it also encourages high performers to leave and poor performers to stay.  High performers are given the confidence to go out and find new challenges, while poor performers appear to get demoralized, and may have fewer options besides.

This research stands in contrast to research on tournaments, which appear to motivate more productive behavior.  Thus, the research indicates that it depends on how the feedback and reward mechanisms interact.  Competition can breed excellence, and competition includes comparisons and consequences.  But comparison alone can breed complacency or demoralization.

HP scandal helps to answer “What is a CEO worth?”

Posted by Marc Hodak on August 9, 2010 under Executive compensation, Revealed preference, Scandal | Be the First to Comment

CEO pay is generally discussed and debated from the point of view of more typical kinds of employees, from minimum wage teens to well-salaried executives, who work for what seem like arbitrary sums offered by frugal or venal owners, or their sometimes clueless representatives on the board.  At this level of the discussion, one loses a key distinction about pay in a market economy, i.e., that one should be paid about what they’re worth.  So, a relevant question in this debate that is never asked:  What is a CEO worth?

Mark Hurd’s sudden, surprise resignation at HP offers a rare hint to the answer; in after-hours trading shortly after the announcement of his dismissal, HP’s stock declined by over 8 percent.

Ladies and gentlemen, that’s over $9 billion dollars in market cap.

So, while various pundits might claim that every CEO is replaceable, the question remains:  at what cost?  The answer isn’t found in the much vaunted proxy disclosures on executive compensation.

That $9 billion figure is a discounted future cash flow assessment of Mr. Hurd’s value.  In other words, in the apolitical judgment of equity investors, the only people with the incentive to make this collective judgment correctly, the company would have been better off paying about $2 billion a year for the next five or six years to keep Mr. Hurd than to lose him.

In fairness to the board, the Mr. Hurd they let go, the man who broke the HP ethics code he had done so much to champion, was not quite the Mr. Hurd the investors thought they had before the Friday announcement.  There was a legitimate concern that the expense-fudging Mr. Hurd could no longer govern with the same authority he had before this unfortunate news came out.  But that’s not the point here.

The point is that the buttoned-down guy atop his Silicon Valley perch that HP’s investors thought they had was worth far more than the mere tens of millions that the media (check out the comments) and good governance types have regularly derided.

Update:  Stephen Bainbridge weighs in.  Larry Ribstein offers his take.

Practical definition: Confiscatory taxation

Posted by Marc Hodak on August 24, 2009 under Collectivist instinct, History, Invisible trade-offs, Revealed preference | Read the First Comment

Confiscatory taxation:  What is going on in Great Britain.

Contrast this with

Socialism:  Using state power to penalize success and reward failure.

Using the threat of violence to take an extra $50,000 from someone making $1 million is not considered a crime if implemented by authorities elected by the people who are, for the most part, not being taxed at that level.  In fact, these people call their confiscation the patriotic or moral thing to do.  They will claim that most of the people being taxed are actually OK with it; but they don’t dare let the class of people paying it vote on whether they should all do so.  They will claim that those who do not wish to pay it lose their claim to their money by virtue of their selfish desire to keep it; but they don’t see the irony of their preferences forcibly imposed on others as a baser form of selfishness, abetted as it is by coercion.

But the victims of this self-justified view of theft-disguised-as-patriotism-or-morality won’t sit still for the grasping hypocrisy.  They will leave.  They take their money and, more important, their wealth-creating talents, to friendlier climes.

“Because your time and money are worth nothing to us”

Posted by Marc Hodak on May 26, 2009 under Revealed preference, Stupid laws | Be the First to Comment

New York State, in an obvious attempt to see just how much it can piss off its taxpayers, has sent an extraordinary notice to all its citizens.  It warns them that not only will their tax rates be raised in 2009, but they will have to recalculate their 2008 taxes now based on the new 2009 tax rates in order to comply with the new law.  I know you think you just misread that last statement, so read it again, and rest assured that it is correct.

Here’s how it works.  Most income taxes need to be paid each quarter on an estimated basis; the state doesn’t want to wait until the end of the tax year to collect its loot.  The typical rule for estimated taxes is the lower of either (a) 90% of your actual tax bill that you’ll eventually have to pay or (b) 100% of your last year’s actual tax bill.  For most filers whose incomes are flat or growing, the easiest thing to do is to look at your tax bill for last year and just pay that in equal installments over the current tax year.  Simple enough.

This year, New York is saying that if you wish to use the second option to pay estimated taxes, i.e., 100% of last year’s taxes paid, you need to recalculate the amount you would have owed last year based on this year’s higher tax rates.

That’s right, the lovely time you recently spent calculating your New York taxes, you need to go through that again now using the new tax rates so that the state can squeeze that last $100 from you without having to wait until next April.  We really are talking about chickensh*t sums, here.  For the 60% of people who hire accountants to do their taxes, the vast majority of them would ending paying more for this recalculation than they would owe in additional estimated payments.

Why would the state do such a crazy thing?  Because the state’s politicians are desperate for those incremental dollars, and they truly don’t care if what it costs you to pay them the lawful amount.

Most debates on tax policy center on the elasticity of supply, i.e., the degree to which an increase in taxes will reduce the willingness of the person being taxed to continue engaging in the taxed behavior.  For example, if raising the sales tax causes people to buy less such that the actual tax raised is minimal, and businesses will otherwise suffer from the reduced sales, most policy makers would say that’s not an efficient tax.  In New York State, we now have proof positive that if a business has to pay someone doing no productive work $10,000 in order to get the state an extra $8,000, the politicians feel they are ahead.  Such abuse of New York State taxpayers is why we are seeing more of this.

Arlen Specter perfectly illustrates political argumentation

Posted by Marc Hodak on May 11, 2009 under Politics, Revealed preference | Read the First Comment

This is a text-book example of the three steps:

1) If you don’t do what I’m asking, you’ll upset your friends, and hurt my feelings

2) If you do what I’m asking, I’ll waive the rules for you and bribe you with other people’s money

3) If you don’t do what I’m asking, I’ll pass a law to prevent you from doing what you want

It’s all here:

Sounds convincing, doesn’t he?  I particularly threw up at the final mealy-mouthed exchange with Harry Reid at the end.

“Why, President Obama?” Good question from a supporter.

Posted by Marc Hodak on May 5, 2009 under Politics, Revealed preference | Be the First to Comment

Asked by the mom of a child in a voucher program that BHO is agreeing to kill:

The answer, left out of this video, can be found here.

Thinking beyond your interests

Posted by Marc Hodak on April 25, 2009 under Revealed preference | Be the First to Comment

Congressman Mark Schauer joins a chorus of politicians pressing the creditors:

The unions have made a number of concessions to ensure the survival of Chrysler.  The question now is what the company’s creditors will do… They have to look at the broad economic impact (of Chrysler collapsing) and not just their own short-term financial interest.

Representative Schauer understands what it takes to look beyond his short-term financial interest.  He’s a community service kind of guy.  Never worked at a productive job a day in his life.  And just because 25 of the top 40 campaign contributors were unions (UAW was #8) doesn’t mean he’s serving his financial interests in arguing for the altruism of others.  I don’t doubt this guy sincerely believes that stiffing the creditors will be good for the economy in a “broad impact” sort of way.

But if sacrifice is what this is really about, Congressman, please show us the way.  I know a Chrysler bondholder, one of the “little guys” who hasn’t accepted government money.  He voted for Obama, FWIW.  He figures he can get about 65 cents on the dollar in bankruptcy, a little less on liquidation than restructuring.  The politicians are asking them to take about 15 cents.  My friend, hearing the Congressman from the UAW asking for some sacrifice, is willing to match him, dollar for dollar.

He says, “I’m willing to take my lumps to the tune of what I contractually signed up for, i.e., a 35 percent loss.  I bought the bonds.  I screwed up.  If you, Mr. Congressman (or Senator Levin, or Governor Granholm, or any other of the politicians standing in front of your union masters and asking us bondholders for an additional sacrifice) are willing to look beyond your short-term financial interest, and share in my loss beyond what the market says I could get from bankruptcy, then I’ll do it.”

So, if you, Congressman Schauer, put up $30,000, my friend says he will take an additional $30,000 hit, below the 60 cents he currently expects.  Put $100,000 into the Chrysler kitty, and he’ll put up $100,000.  What do you say, Congressman?  Senator?  Governor?

I will pre-emtively and perhaps unfairly say, “I thought so.  You’re happy to ask for sacrifice, as long as it’s coming from others.”

I’ll give my friend the last word:

There are people who have bought into these securities at already depressed prices.  I’m not one of them.  We picked them up at issuance.  While the unions were happy to collect their well above-market wages and benefits, I watched the value of my bonds drop.  Now that they’re willing to work for only slightly above market wages and benefits, they’re expecting me to suck up much worse losses.

He closed with an unprintable invitation for the politicians to engage in something that sounded like self-copulation.

Practical definition: Agency cost

Posted by Marc Hodak on April 23, 2009 under Politics, Revealed preference | 4 Comments to Read

Speak clearly directly into the mic, please.  Now say again?  At the moment you realized that your shareholders would be screwed by the ML transaction, and it was time to invoke ‘material adverse change’ to back out of it, why didn’t you do it?

I can’t recall if [Hank Paulson] said “we would remove the board and management if you [invoked the material adverse change clause to block the Merrill deal]” or if he said “we would do it if you intended to.” I don’t remember which one it was, before or after, and I said, “Hank, let’s deescalate this for a while. Let me talk to our board.”

There it is.  When the BAC board, including Lewis, came face-to-face with doing right by their shareholders or keeping their jobs, they chose to “deescalate.”  Later they rationalized:  getting fired = systemic risk.

So, Ken, you decided not to back out of the deal, what about at least telling your shareholders what you were getting them into?

Q: Were you instructed not to tell your shareholders what the transaction was going to be?

A: I was instructed that ‘We do not want a public disclosure.’

Q: Who said that to you?

A: Paulson…

Q: Had it been up to you would you [have] made the disclosure?

A: It wasn’t up to me.

So, the government ordered you to shoot your shareholders from behind a curtain, and you pulled the trigger.

Not corporate governance’s finest hour.

What would Lloyd do?

Posted by Marc Hodak on April 7, 2009 under Executive compensation, Revealed preference | 2 Comments to Read

Pretending to be one of the culpable

Pretending to be one of the culpable

Goldman Sachs CEO shared his idea of how executive compensation should look:

•  Compensation should take into account strict adherence to a firm’s management and controls, especially with respect to a person’s judgment and exercising that judgment in terms of risk in all of its forms.  That evaluation must be made on a multi-year basis to get a fuller picture of the effect of an individual’s decisions.

•  Individual performance must not be viewed in isolation. Individual compensation should not be set without taking into strong consideration the performance of the business unit and the overall firm. Employees should share in the upside when overall performance is strong and they should all share in the downside when overall performance is weak.

•  No one should get compensated with reference to only his or her own P&L. Compensation should encourage real teamwork and discourage selfish behavior, including excessive risk taking, which hurts the longer term interests of the firm and its shareholders.

•  Compensation should include an annual salary plus deferred compensation, which is appropriately discretionary because it is based on performance over the entire year.

•  The percentage of compensation awarded in equity should increase significantly as an employee’s total compensation increases.

•  For senior people, most of the compensation should be in deferred equity.  Only the firm’s junior people should receive the majority of their compensation in cash.

•  As I mentioned earlier, an individual’s performance should be evaluated over time so as to avoid excessive risk taking and allow for a “clawback” effect.  To ensure this, all equity awards should be subject to future delivery and/or deferred exercise over at least a three-year period.

•  And, senior executive officers should be required to retain the bulk of the equity they receive until they retire.  In addition, equity delivery schedules should continue to apply after the individual has left the firm.

In other words, it should look a lot like Goldman Sach’s executive compensation plan.

Read more of this article »

“It’s about our fundamental values”

Posted by Marc Hodak on March 16, 2009 under Revealed preference | 2 Comments to Read

“How do they justify this outrage to the taxpayers who are keeping the company afloat?” Obama asked. “This isn’t just a matter of dollars and cents. It’s about our fundamental values.”

That’s President Obama on his increasingly hysterical strident attempt to force AIG to renege on its contract to it managers.

For me, this the most telling moment in Mr. Obama’s presidency.  Here is where he gets to show us his fundamental stripes.  This is his teaching moment to the nation.  His choice is as simple as it is inescapable: A or Not A:

A:  The AIG executives whose irresponsible, short-sighted behavior pushed their firm to the brink of insolvency, and who forced our nation to bail them out at an unconscionable cost, are now in a position to reap the rewards of a contract that was put into place long before anyone suspected that their mistakes would lead to disaster.  The media has been calling the payments from this contract a “bonus.”  It is not a bonus.  A bonus is something you earn for performing.  It is, in theory, forfeitable if you fail to earn it.  This contract guarantees payment.  This is like salary that has been deferred, to be paid in installments.  Calling it a bonus twists the word beyond recognition, and serves to needlessly inflame passions.

As distasteful as it to see these people receive this payment, whatever it’s called, this nation is built on people honoring their agreements.  Children learn about the basic requirements of civilization on the playground when they are rebuked for reneging on their promises, or welching on a deal.  Americans don’t welch.  Americans don’t look for excuses to welch.  We know how easy it is to find them.  Americans don’t encourage welching.

Besides, we don’t need to encourage the abrogation of a legitimate contract, no matter how ill-conceived or inopportune, in order to restore a sense of fairness in this particular situation.  The CEO of AIG, a man appointed after its collapse to help bring things under control, has determined that the people in this group, the group that destroyed the company, have many non-contractual elements to their pay.  The non-contractual elements do not have to be paid.  For the 25 top executives, their salaries, ranging from $270 thousand to $500 thousand, will be reduced to $1, largely counteracting the value of their bonuses.  Every other manager in the group will have their bonuses largely counteracted by a 10 percent reduction in their salaries.  These managers are free to leave, whereby they will forfeit their remaining bonuses.  Or they may stay on, to try to apply their talents to remedy the destruction their unit has wrought, and be paid a fair wage for doing so.

Not A:  We don’t want the company to pay these people, regardless of any agreements.  We’re angry.  We can’t let individuals who have harmed us hide behind a contract.  Paying these people would offend our sensibilities.  We will use all our power to prevent it.

A is the rule of lawNot A is the rule of men.  This, Mr. President, is where you clarify for the young people who supported you what kind of country you want them to inherit.  Which is it?

UPDATE:  This morning I added a little to his “A” speech.  He won’t mind.  We just feed it into the teleprompter…

One of the more unfortunate slurs heaped upon our Native Americans is the term “Indian giver,” which is opprobrium for someone who takes back what they give or promise to another.  It is particularly ironic that we apply it to a group to whom we have violently broken so many promises, using their rebellion and occasional crimes as an excuse, and taking shameful advantage of their political vulnerability.